It plans to be able to scrutinise the "full implications of foreign ownership … for the purposes of national security", by introducing "a cross-cutting national security requirement for the continuing Government approval of the ownership and control of critical infrastructure". The Government's precise plans are not yet clear, although it will no doubt be mindful of the need not to deter otherwise welcome foreign investment.
What is "critical infrastructure"?
The meaning of "critical infrastructure" remains to be clarified, although it is clear that it will include nuclear energy. Other forms of energy generation and delivery infrastructure seem likely also to be included. Utilities such as water, communications (fixed and mobile telecoms networks, radio spectrum, cable networks etc) and transport networks (rail, road, air) might also be subject to the new foreign investment controls. The scope of the control may not be exhaustively defined if the Government wishes to maintain flexibility, although in that event we would expect some degree of guidance to be provided.
Foreign investment review as part of merger control?
The mechanism by which the Government will exercise control has not yet been specified, although it has been announced that the public interest provisions of the Enterprise Act 2002 will be reviewed. These provisions allow the Secretary of State to intervene in mergers which qualify for UK or EU merger control (as well as some non-qualifying mergers), to ensure that public interest considerations are taken into account in addition to assessing the impact of the merger on competition. The current grounds for intervention already include the interests of national security (as well as media plurality and the stability of the financial system), so it remains to be seen how far the new control will extend the existing regime. If required, a new public interest provision relating to critical infrastructure control could be implemented swiftly and simply without the need for new primary legislation.
A new standalone mechanism for on-going authorisation of foreign investment?
Alternatively or additionally, the Government may be considering creating a new standalone control mechanism for foreign investment (as is the case in many other countries). In particular, the UK and EU merger control rules apply only to investments above a certain level (conferring "material influence" for UK merger control rules or "decisive influence" for the EU Merger Regulation). The Government may wish to be able to scrutinise any scale of foreign investment. Moreover, UK merger control only captures a change of control of an existing business. It does not apply to new builds. Of course most critical infrastructure in the UK is already built, but the Government may nevertheless want the power to scrutinise any new infrastructure investment involving foreign partners. As regards nuclear new build projects (other than Hinkley Point C), the Government also stated in its 16 September announcement that it will secure a "special share" arrangement for the UK to ensure that significant stakes in such projects cannot be sold without its consent. Pre-Brexit, the Government will need to have regard to the constraints on "special shares" deriving from the EU rules on free movement of capital.
The BEIS announcement refers to "continuing Government approval". This might suggest some form of authorisation regime, with on-going commitments and the possibility of withdrawal. This would contrast with the one-off clearance process of merger control.
Following the international trend
This new initiative is not out of line with international trends. In fact, the UK is relatively unusual amongst major global economies in not, to date, having powers to control foreign investment or takeovers of domestic businesses. By contrast, the USA scrutinises the impact on its national interests of foreign acquirers of US businesses through its Committee on Foreign Investment in the United States (CFIUS); Australia exercises control through the Foreign Investment Review Board (FIRB) and Canada applies the Investment Canada Act (ICA) to review investment by non-Canadians. Transactions can be blocked outright or approved only following changes to the deal (such as commitments regarding the nationality of board members, location of corporate headquarters, tax arrangements etc).
Many EU countries also control foreign investment, notwithstanding the constraints of the EU free movement of capital and non-discrimination rules. Control in France includes "sensitive" sectors such as energy, water supply, transport, electronic communications and public health, as well as businesses, infrastructure or facilities of "vital importance" to France. In Germany, the Foreign Trade Act allows the review of foreign investment in German companies on public security grounds. EU Member States are in principle permitted to protect "legitimate interests", including public security, even where their national merger control has been disapplied by the EU merger rules.
Wider controls on foreign investment to follow?
Finally, the controls on "critical infrastructure" may not be the last word as regards new Government scrutiny of foreign investment in the UK. When Theresa May announced her "proper industrial strategy" initiative in July, she referenced the potential damage to UK interests from transactions such as Pfizer's abortive tax-inversion bid for AstraZeneca and Kraft's takeover of Cadbury (which resulted in job losses despite earlier assurances). Her strong statements appeared to presage a review power much wider than critical infrastructure only: this may therefore be the first, but not the only, new control.
